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Canada's pot industry still budding

Nicolas Martin
July 31, 2019

For almost a year now, recreational marijuana can be legally sold and purchased in Canada. But what looks like a once-in-a-lifetime business opportunity is proving to be an elusive pot of gold, reports Nicolas Martin.

Cannabis store in the Canadian town of Hamilton, with a group of customers checking out prices and offers from a big screen
Image: DW/N. Martin

In the small Canadian town of Hamilton, about an hours drive away from the next big city, Toronto, the Hello Cannabis store greets potential customers with a simple placard flashing a smiley and the word "Hello."

Apparently, it doesn't take much more for the company to pique people's interests in its assortment of pre-rolled joints, cannabis buds, oils and pills — some of them even without the psychoactive ingredient of the popular drug. Every day, between 400 and 700 customers call in at the store owned by Oliver Coppolino.

When I met him, he readily showed me around the store, pointing to big screens on the walls where customers can "pick their menu" and look for themselves what treats are in store for them. But more individual advice is also on offer.

"We do usually have floaters around with a tablet who can answer any kind of questions and guide people through the menu," he told me.

Cananbis tore owner Oliver Coppolino smiling in front of his company's logo — a smiley saying "Hello."
Store owner Oliver Coppolino has every reason to smile about rising sales and profitsImage: DW/N. Martin

Coppolino's cannabis store is meanwhile one of 50 in the Canadian province of Ontario, each of them with a market of about 300,000 potential customers. He's struck a pot of gold, you might think now, which, indeed, he seems to have. Demand is huge, he says, which makes him "very happy."   

"Basically our main problem is a supply issue. We always have some products, but some hot products that everybody wants sell out very quickly."

Da world's weed nation

Canada legalized the use of medicinal marijuana back in 2001. In October last year, the government of liberal Prime Minister Justin Trudeau also allowed the private consumption of cannabis for recreational purposes, however limiting the amount a person can possess to 30 grams. Even before the liberalization, pot consumption in Canada was already one of the highest within the industrialized world, with estimated illegal sales of close to CAN$6 billion (€4 billion or $4.4 billion) a year.

Mark Rendell, a business journalists writing for Canada's second-largest daily, The Globe and Mail, says the decision to legalize cannabis has now led to a gold rush mentality within the emerging industry. A market watcher for more than a year, he saw even sober-minded investors get "high" on cannabis stocks, he says.   

"It is very rare that Canada leads the way in any industry. Because of federal legalization, the banks and the stock exchange in Canada have become much more comfortable much earlier than any other country in any other financial system with financing cannabis."

High-rise building in the banking district of Toronto
The cannabis boom has been funded by numerous investors from Canada and abroad. Some of the new companies listed their stocks at the Toronto Stock Exchange to secure financingImage: DW/N. Martin

Read more: Cannabis capitalists scrutinize future of UK's fledgling industry

Even before the Trudeau liberalization came into force, several companies had listed at the stock exchange in anticipation. They had gambled on a promise made by the prime minister during his 2018 election campaign. The funding they had secured gave them a head start in the new industry.

However, the cannabis legislation eventually turned out to be a compromise between the main political parties, giving the central government in Ottawa the final say on granting production licenses, while the provincial governments must decide about the cannabis products that can be sold.

Heady stuff — the business of legal cannabis

Shadow market still booming

Mark Rendell explains that some provincial governments, like the one of Ontario, were rather reluctant to grant licenses for commercializing the drug. In addition, production licenses are still slow in coming, with more than a hundred companies still waiting to start growing and leading to supply bottlenecks in the market.

Crop failures and quality issues are compounding the problems of the nascent industry, he says, so that investing in the massive buildup of horticulture greenhouses that are emerging everywhere is a risky business.

As a result, only about 20% of the Canadian cannabis market is in the hands of licensed dealers and producers, the country's statistics office has estimated recently, with the rest coming from illegal sources.

Industrial growing

The town of Leamington, Ontario — much closer to Detroit than Toronto — shows what the industry's future may look like. There, a company called Aphria is currently building Canada's most modern horticulture greenhouse for growing cannabis.

Situated in Canada's southernmost tip on the shores of Lake Erie, the town has a more favorable climate than other regions in Canada, allowing the growing of tomatoes and cucumbers indoors. The veggies are gone, however, although the company still uses the old machinery left by the former food production, says Brett Marchand.

"It is a brand new industry you get a chance to build," the Canadian army veteran, who also worked in the meat industry, tells me as we stroll through the sprawling complex. "Most people don't get a chance and this is a once-in-a-lifetime opportunity to be part of something right from the beginning." 

Growing pot in greenhouses provide more favorable conditions than growing cannabis under artificial light
Growing pot in style. Brett Marchand says that greenhouses provide more favorable conditions than growing cannabis under artificial light, which most producers — legal and illegal — doImage: DW/N. Martin

More hype than substance?

Pot plants stretch as far as the eye can see in the first of three greenhouses, where Aphria has just launched production trial runs. Robots plant small seedlings placed under their mechanical hands by large assembly lines.

Marchand is confident that the market will continue to grow. "We haven't hit the top, we are just one of many that are starting from a small amount and growing up. In probably two years from now we won't have a supply problem. Every time we give more supply to the market they open up another store," he says.

Aphria has invested more than CAN$95 million in its Leamington complex in hopes that the automated production line will save it energy and personnel costs. The company's stock market value has soared to more than a billion Canadian dollars recently, although revenues are still lagging far behind with just over CAN$36 million last year.

An assembley line with workers sampling cananbis buds
Cannabis production is still rather labor-intensive reducing the margins growers can reach with their productsImage: DW/N. Martin

Canada's pot boom has also been fueled by a number of recent multi-billion-dollar investments and partnership from the food and tobacco industry. They all want to be part of the alleged gold rush which market analyst Arcview Group has estimated could reach sales of CAN$6 billion by 2024.

Yet, market watcher Mark Rendell is skeptical in view of the many broken promises made by a lot of companies about their production targets so far. "Companies had to drive their story forward, they had to come out with press release after press release ... saying we are going to build this and sell this because they were talking to a retail investor audience. So there was a real shock, how much they underperformed."

Rendell doesn't expect market supply and demand to balance out for at least three years. Much would also depend on whether black market sales can be curbed so that more consumers buy their pot in official stores from licensed producers. Hardly a year after Canada legalized cannabis, it's not yet safe to say if the bold policy will really become a business success story or simply go up in smoke.